The US Dollar (ticker: USDOLLAR) rallied to start the week as the Euro initially fell to multi-week lows, but a sharp reversal left the safe-haven currency lower as the US S&P 500 finished just shy of record peaks.

Directionless forex market price action has proven frustrating, but the week ahead promises significant volatility on potentially pivotal US Federal Open Market Committee (FOMC) and European Central Bank (ECB) interest rate decisions. Top-tier event risk continues through Friday’s US Nonfarm Payrolls report, and it’s little exaggeration to claim that the coming days could define the following month of US Dollar price action.

Market expectations show that the FOMC is extremely unlikely to change interest rates or make concrete adjustments to current monetary policy. Yet a recent rough patch in US economic data suggests that Fed officials could project that aggressive Quantitative Easing measures could remain in place for longer than previously expected.

Forex markets may take their cues from any obvious shift in Fed rhetoric, but the biggest currency mover may come on Thursday’s highly-anticipated European Central Bank interest rate decision. Survey data from Bloomberg News show that approximately 60 percent of all polled Economists believe that the ECB will cut interest rates by 25 basis points. It would be the first such cut since July of last year, and it would reaffirm the central bank’s commitment to limiting the fallout from current European economic crises.

We question the value of an ECB rate cut as official Euro interbank lending rates (EURIBOR) are well-below the ECB’s Main Refinancing rate; the bank’s aggressive lending keeps monetary conditions far easier than the headline interest rate suggests. Overnight Index Swaps, which institutions use to hedge against and/or bet on official interest rate moves, predict that real market rates will stay the same. Yet we can’t argue with the fact that there is considerable disagreement over the future of ECB rates, and many speculate that the central bank could likewise introduce unconventional easing measures. Given Euro Zone unemployment rates at or near multi-decade peaks, the pressure is on the ECB to get more aggressive in its fight against economic malaise.

The combination of the FOMC and ECB rate announcements would normally be enough tocall it a critical week for the EURUSD and Dollar pairs, but end-of-week April US Nonfarm Payrolls data makes it a potential make-or-break for the Greenback versus major currencies. Sharply disappointing March NFPs data ended a streak of better-than-forecast labor market results, but financial market fallout was surprisingly limited. Eurodollar (interest rate) futures initially showed expectations that interest rates would stay unchanged for longer than previously priced in, but those same contracts are now roughly at pre-March NFP levels.

The question is simple: can the US Dollar uptrend survive if NFPs disappoint for the second-consecutive month? Wednesday’s ADP Employment report, ISM Manufacturing Employment result, and statement from the FOMC rate decision may further shape expectations heading into Friday’s labor market print. As it stands, Bloomberg News data shows economists’ forecasts are remarkably consistent. Given 71 responses, the lowest estimate calls for a 100k jobs gain and the highest points to 200k—giving a mean and median forecast of approximately 150k jobs.

Such a tight range leaves ample room for surprises, and we expect to see big US Dollar volatility in the make-or-break week ahead. - DR

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